Market to Market (August 28, 2020)

Aug 28, 2020  | 27 min  | Ep4602

Coming up on Market to Market -- Storms surge into the south as fires blaze in the west. A drought tightens its grip on the Midwest. U.S. tanneries specialize to survive. And market analysis with Shawn Hackett, next.

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What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

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Tomorrow. For over 100 years we have worked to help our customers be ready for tomorrow. Trust in tomorrow. Information is available from a Grinnell Mutual agent today.

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This is the Friday, August 28 edition of Market to Market, the Weekly Journal of Rural America.

Hello, I’m Paul Yeager.

This week marked the 15 year anniversary of Hurricane Katrina, one of the most devastating storms to hit the United States.

As Hurricane Laura churned across the Gulf, the system came ashore west of Katrina’s 2005 path.

The hurricane's arrival was just one more of August’s weather events impacting rural America.

John Torpy reports.

The third major weather event to strike the U.S. this month had the gulf coast clearly in its sights.

Hurricane Laura, a Category 4 storm packing torrential rains and wind speeds of 150 miles per hour, made landfall at Cameron Parish in southwest Louisiana.

A powerful storm surge of 9 to 12 feet followed the hurricane into an area from Sabine Pass, Texas to Port Fourchon, Louisiana. The port is the pathway for 90 percent of oil and gas production in the Gulf of Mexico.

So far, six people have lost their lives and more than 800,000 people are without power. Emergency officials say it could be days before the extent of the damage is known, especially to the Pelican State’s number one commodity, cotton. According USDA data, last year’s Louisiana crop was worth of $186 million.

Hurricane Laura quickly weakened as it made landfall. However, weather forecasters warn it could regain strength as it heads towards the Atlantic Ocean, possibly bringing rain and high winds to the Northeast.

In Northern California, favorable weather is assisting over 2,200 firefighters working to gain control of the wildfires burning in Napa and Sonoma counties. Crews have only been able to contain roughly 30 percent of the largest blaze, which has consumed almost 370,000 acres in the heart of wine country.

Ryan Klobas, CEO—American Farm Bureau Napa County: “I've had several members contact me over the last few days, um, telling me that, you know, people they've had a long standing contracts with, to purchase their grapes are not purchasing this year./ You know, this is Napa Valley and, uh, the land is expensive and the commodity is expensive. And so not being able to either conduct a successful harvest, we're not being able to sell your fruit will absolutely mean, um, the financial predicaments for a lot of people.”

Currently, more than 10,000 personnel are fighting various fires that have consumed more than one million acres across California.

Nat Sound Spike

In the Midwest, a drought is following in the wake of the derecho storm which leveled millions of acres of crops just over two weeks ago. The Midwest is only a portion of the U.S. that is sharing those drought conditions.

According to the U.S. Drought Monitor abnormally dry conditions have spread across the west and southwest growing by just over three and a half percent since last week. The same can be said for exceptional drought areas where the lack of moisture grew by nearly the same amount. The current drought patterns are closely mimicking those seen in 2018.

For Market to Market, I’m John Torpy.

One of the major components of the recently-completed political conventions is the platform. Republicans and Democrats are taking different approaches on issues facing rural America.

Voters will select the next mix of politicians in a little more than two months as Americans keep an eye on the economy. --

Consumer spending increased 1.9 percent in July, adding a third month of improvements since April’s 12.9 percent decline.

New Home Sales climbed 13.9 percent, continuing several months of robust growth.

Durable goods, items with a three-year or greater life span, jumped 11.2 percent adding to recent gains.

Without the more volatile transportation sector, Core Capital Goods moved a modest 2.4 percent higher. --

The U.S. leather industry is a sector of the economy with direct ties to agriculture that is experiencing declines.  From the boots you wear to the footballs thrown in the NFL, this millennia old industry is looking for ways to slow the drop and grow profit margins.

Colleen Bradford Krantz has more in our Cover Story

Historians believe tanneries - where craftsmen turned animal hides into leather – first appeared at least 5,000 years ago in villages in the Middle East.

Today, communities still gather together workers - such as these in Pennsylvania - to process cattle and other livestock hides using method not so different from those used by their hunter-gatherer forefathers.

Tim Ng, board member, Leather and Hide Council of America: “The tanning industry is one of the oldest industries in the world ... It’s a direct by-product of the meat industry. And so, as we harvest animals for meat, just like the Native Americans, we try to utilize all of the components of the animal. That skin is about 6 to 10 percent of the animal weight and so if we can capture that and use that for other products, that helps keep it out of landfills.”

But tanneries are becoming increasingly rare; while colonial America had a tannery in nearly every town, these businesses have been rapidly disappearing. The number of U.S. tanneries with 50 or more employees dropped from 86 in 1993 to just 20 in 2018.

According to the federal government, water treatment and other improvements to protect human health and the environment were costly for some tanneries. Many closed while others relocated to countries with lower-cost labor. International disputes  and the growth in synthetic materials have also hurt the industry, as well as disruptions related to the COVID-19 pandemic.

Tim Ng, board member, Leather and Hide Council of America: “Leather is a natural product. It’s breathable, it’s flexible, it wears over time. With synthetics, they are typically petroleum-based, which is a finite resource.”

The tanneries that have survived have done so largely through specialization or a focus on exporting.

Tim Ng is the director of West Des Moines, Iowa-based C.K. International Ltd., which buys and sells pigskin internationally. Pigskin accounts for only about 10 percent of the world’s leather. C.K. International helps connect U.S. packing plants with buyers of pigskin, mostly in Asia, who then use the leather in other products.

The majority of leather is made from cattle hides, and used in shoes and boots. But automobile and furniture use remain significant.

Over 90 percent of cattle hides produced in the U.S. are exported – China still being a key buyer. The cattle hide industry’s export values slid 25 percent between 2018 and 2019, when $1.2 billion worth of hides were shipped elsewhere. And with the Covid-19 pandemic creating havoc, the slide has continued well into 2020. Still, Ng tries to remain optimistic despite these major disruptions and depressed prices.

Tim Ng, board member, Leather and Hide Council of America: “As we have more transparency into where products come from and as consumers demand that, I think the industry is really positioning themselves well to be in play and be part of that discussion.”

In Curwensville, Pennsylvania, the leather tannery Wickett & Craig brought dozens of jobs to town when the now 153-year-old company moved there from Toronto, Canada in 1989. It still employs about 90 people in the town of about 2,500, and is one of just a few large U.S. tanneries remaining that uses plant-based compounds, known as vegetable tannins, on the leather.

Most others use chromium tanning, a method introduced in the 1850s and viewed as the most efficient processing method. There is a small risk – if exposed to extremely high temperatures – that chromium can convert into a type known to be a carcinogen. U.S. regulations, however, govern proper disposal and water treatment for all tanneries.

Matt Bressler, vice president, Wickett & Craig: “Vegetable tanning is the oldest form of tanning. It all comes from tree bark extract…These trees are grown for the tanning industry.”

And while the chromium tanneries can process a hide into leather in a week, vegetable tanneries require six to eight weeks from start to finish.

Matt Bressler, vice president, Wickett & Craig: “When you get a pallet of hides, you have no idea what you have in there… We’ve tried to turn it as much into a science so that we can be consistent. I mean, the cattle are never going to be consistent… so those are the variables every tanner has to deal with.”

The Wickett & Craig leather factory processes nearly 5,000 cattle hides a month, most from Charolais, Simmental and Limousine cattle because of the lighter colored hides. Cattle brands and any other imperfections on the hide reduce the value.

Matt Bressler, vice president, Wickett & Craig: “Most of them are from the Dakotas or from Toronto and other Canadian regions. The farther north you go, generally the better the hides are because there’s less summer and hence the less bug bites, less scratching and things like that.”

Bressler says the chromium-tanned leathers tend to serve the automotive and garment industries while Wickett & Craig might have their thicker leather used in equestrian equipment, gun holsters and handbags.

Bressler says most Americans fail to appreciate the quality of work done in the U.S. regardless of tanning method.

Matt Bressler, vice president, Wickett & Craig: “Why should they pay … $40, $50 or $60 for a genuine leather belt that the leather came from Wickett & Craig when they can buy one at Walmart for $12.95?.… The end consumer is probably not as knowledgeable as they probably should be but it’s getting better.”

For Market to Market, I’m Colleen Bradford Krantz.

Next, the Market to Market report.

Yeager: Demand with a side of weather fed the bulls this week as the market tries to sort out potential crop losses due to a derecho and drought. For the week, December wheat improved 14 cents while the nearby corn contract jumped 19 cents or six percent. China’s buying spree coupled with hot and dry weather is driving the soy complex. The November soybean contract rocketed higher by 50 cents. December soybean meal rose $12.20 per ton. December cotton expanded 80 cents per hundredweight. Over in the dairy parlor, October Class III milk futures rallied with a $1.39 gain. A down week in the livestock sector. October cattle fell $3.65, October feeders declined $1.73 and the October lean hog contract dropped 60 cents. In the currency markets, the U.S. Dollar index dropped 87 ticks. October crude oil gained 71 cents per barrel. COMEX Gold rebounded for a $28 per ounce improvement. And the Goldman Sachs Commodity Index increased almost 10 points to finish at 360-even.

Yeager: Joining us now to give us some insight is one of our regular market analysts, Shawn Hackett. Hello, sir.

Hackett: Hey, Paul, how are you? Thank you so much for having me, always an honor and a privilege.

Yeager: Good to see you. Good to have you here. Like we do with you, we play rapid fire. Let's start with wheat. This is the one that kind of went along for the ride with corn last week and then this week the United Kingdom said, we're probably going to have the worst crop in 40 years. Was that the main market mover or was there something else?

Hackett: I think there was something else, Paul. Generally we're moving into a major La Nina weather pattern which is hot and dry for the U.S., hot and dry for Europe and hot and dry for Russia. We're really concerned that the hot, dry weather for Russian winter wheat planting is going to become the bigger problem and a market mover here. And so we think that was the bigger driver this week because if they get off to a poor start and have poor stands and dry weather over there that could be a big driver as we move into the spring season.

Yeager: We're nearing resistance if we didn't possibly break through it today in trading. Are you selling right now to take advantage of this or are you waiting for this thing to go higher?

Hackett: We would only be selling short-term cash needs, we think there's more room to run in the wheat market. We really try to be patient unless you absolutely have to move bushels and if you do you always want to sell a rally like this.

Yeager: Moving higher, $6 is that on the table?

Hackett: We think $6 is a distinct possibility on the charts when we look at it. So we would kind of take a look at that as a September target for cash sellers to maybe get more aggressive here.

Yeager: Are you aggressive right now in corn? Again, breaking through resistance, $3.57 I think was the resistance going into today. We finished above that on the December contract. What is the upside on the corn market?

Hackett: We're still not that aggressive here, Paul, on selling cash corn. Obviously there's always farmers that have to move this time of year cash corn and we would definitely be doing some short-term needs. We worry there could be a buy the rumor, sell the news here leading into the September 11th WASDE report and so somebody has got to move some near-term corn that would be something to do to avoid having to take that kind of a hit. Intermediate-term though we still think higher prices can be had as the market has to adjust further down yields.

Yeager: Is that because of weather that's adjusting down, dry conditions, what happened in the derecho area? Is there something else weather related that I'm missing?

Hackett: The bigger issue, we've been talking about this all summer, is that we had June temperatures were 3 degrees above normal, July temperatures were 2 degrees above normal, we went back to 1960 and looked at every summer we had temperatures that high and every single time we had a below trendline yield crop that was modulated by moisture. So we never believed the 182 number and we think that's the primary reason why yields need to come down but of course the storm in Iowa just adds a maraschino cherry on top of the cake here.

Yeager: So you're holding right now. How much longer at $3.70 on the March contract?

Hackett: Counterseasonal trends that we're in right now, Paul, tend to top out in the month of September. So we think whatever highs we're going to make here the September month is when we'd be looking for some kind of intermediate high, we don't think we're there yet.

Yeager: You did kind of just steal, I shouldn't have told you what I was going to ask you. Darn it, I'll remember not to do that. I'm kidding. Dan in Northwest Iowa and Nathan in Inwood, Nathan is our question and it is about that countercyclical trend, Shawn, I want to point it out specifically here. It seems like we're doing things counterseasonally this year. Will we experience seasonal harvest pressure on both corn and soybeans?

Hackett: Yes but delayed meaning we'd normally see seasonal pressure from back half of August into the back half of September normally. This year we're going to see it in October after we make the September high. Remember, Paul, we normally make our highs in late June or early July, we made a low, so we're doing everything opposite. This is typical, classical, pre-La Nina kind of weather where we get weather problems later in the season that cause this consternation and counterseasonal trends. So I guess the answer to the question is yes but it will be delayed from normal.

Yeager: So we're holding a little bit on corn. Let's talk soybeans then. There are numbers that begin with 5 and 5 on a weekly gain on the November and January contract. This is a big question. Are we just getting started on this contract?

Hackett: We don't, we actually have been talking about a $9.50 target for quite some time that was our target for what we thought would be a combination of weather and demand coming into play. Our smart money algorithm that we utilize that we put together that uses the COT report on Friday is seeing some very aggressive selling in recent weeks and we're very close to achieving what we call a smart money sell signal and we utilize that tool to kind of pinpoint when we want to get more aggressive on the cash side of the market. So we think cash beans need to be sold a little more aggressively here than the corn and wheat, for example. We think that's more of a pressing opportunity.

Yeager: So since we've broken through resistance you're saying this is different than what you've said with wheat and corn, this is something you've got to take advantage of because this is longer. Are you booking sales past November now?

Hackett: We’re not doing it past November because we're concerned about South American weather being an issue with LA Nina. But we absolutely believe that we would want to be taking care of our cash sales into the November timeframe right now. We really do not see that $9.50, $10 area being exceeded. We see some very cool temperatures coming here in a few weeks in September with some moisture and that is going to take a lot of this weather excitement off the table we think.

Yeager: So that is the weather story on that one. But then there's the story that came out of China this week where they said, China may buy 40 million tons. That would be 25% above year one, Phase 1 amounts. That maybe is a fundamentals piece of news saying we're going higher. You don't buy that?

Hackett: We heard a lot of talk, Paul, over the last couple of years from the Chinese and so we tend not to believe much of what they say, we only believe what they do and right now all they've done is buy back to normal levels from arguably horrible levels from a year ago. So it's always possible that maybe they could come in and run the market higher but we don't think they're quite ready to do that.

Yeager: Okay. You're saying show me the money. Got it. Cotton wise, there's some money this week. This storm, Laura, kind of missed a lot of the cotton area, there was a little bit of concern that maybe that was the run- up but we missed it. What more does it play in this market?

Hackett: China has been buying a lot, like they've been buying everything, Paul. But we're worried about the cotton market, we're trading at a hefty 10 cent premium over the national price, our domestic demand is not very good and we think that unless we were to get a hurricane that were to come into more of what we call the core cotton growing areas that this one missed, this 65, 66 area, Paul, is concerning to us and we're getting some pretty bearish readings on our smart money algorithm. So we are a cash seller here.

Yeager: Dairy wise, there was some contraction in the price over the last three or four weeks, this week we reversed course. Which way are we headed now?

Hackett: Government buying, government buying, government buying. That's really the story, they announced the one billion food box plan and came in and bought the market aggressively, especially the cheese market, and so we've been dealing with this, Paul, since April and they come in with a blaze of glory and then they pull back like they did over the last month and prices crash so it's a really volatile market right now. But as a producer we would be looking to sell government-led rallies because we think that we're going to continue to see production improve and get ahead of the government buying program.

Yeager: Up 8.5% today, or for the week, and $1.39 up to $17.72. That's quite a move. In the livestock sector, let's talk cattle first. In the live market again this is about China. They made a large purchase on august 20th, the week ending August 20th that was the largest weekly buy on record dating back to 1999. On the surface I'm going to say that's a big deal, but of course there's more to the story. What is it?

Hackett: Well, they hadn't bought from us for years and years and years and only a few years back did they agree to buy beef from us again. So we don't really have a long history of them buying U.S. beef. So even though we'll take it, its good news, we would kind of downplay that as being a big market driver at this point. It could be a market driver in the future but we don't think it's a major market driver at this moment in time.

Yeager: Wednesday we marked four out of five days lower, we continued that streak as the week went on. That trend is heading down, is it going to keep going down and how much?

Hackett: We think there's a little more room. We kind of got bearish with our customers and recommended cash sales at that $110 area in October and we're just worried about demand here, Paul. We think the U.S. economy although we're rebounding beef is a high priced item and we're concerned and we think the $1 a pound level is achievable on the October contract before we might dig our heels in and say that's enough for now.

Yeager: Because the consumer ultimately decides and that battle between pork, chicken, poultry and beef, which one is cheaper is what they're going to go with and that's what you're telling me there's still room to go. So let's talk feeders then in a sense we still have, we're coming out of this ridiculously bearish report last Friday and the market initially didn't respond the way we thought it would, but then it caught steam. Why the change?

Hackett: I just think sometimes it's hard for the bulls to give up a trade that they've been bullish on for a while, that they're making money on, and so everyone looks around and as long as everyone is still buying into it they're good and then all of a sudden someone decides to sell and it causes a cascade on selling. Markets are run by computers a lot of times nowadays, the algorithms trade a lot of our markets and they don't think like you and I sometimes and it takes them a little while to get the program to say sell and we think that had more to do with it than anything else.

Yeager: So the question becomes though if you’re a producer looking to expand your herd right now are you?

Hackett: We would not be. We would not be looking to do that right now. The cattle on feed report was a warning sign that maybe we're doing too much of a good thing. Prices rallied but not enough to really cause a good margin on the farm. We'd be very careful, cautious and if the corn market were to continue to head higher as we move into the South American growing season, high corn prices are not good for feeder cattle prices.

Yeager: So maybe that will be what puts any idea of expansion in the live market. Hog wise, China is selling reserves, lower cold storage in the United States. Are the Chinese buying U.S. pork?

Hackett: They are, they have been buying U.S. pork all year long. We have never had a pork demand problem, Paul. We had a too many animal problem and we had a too less through put program at the packing houses. We've remedied the packing houses, I believe we're remedying the too many animals problem and we're just starting to get to where this strong demand can overcome endless supply in the U.S. and that is why October prices have started to respond a little it even though they came back a little bit today.

Yeager: So the question then is we were down 60, is it going to go much lower or are we going to hold here?

Hackett: We think we're going to hold here. We think we've made a bottom and we're heading higher. For cash sellers of hogs we'd be patient. We think there's more room to the upside before we might play out this imbalance that we see coming.

Yeager: All right, Shawn Hackett, rapid fire, love it, thank you so much.

Hackett: Great to be here, Paul. I'd love to come back again, in-person next time.

Yeager: Let's hope so, very soon. That will do it for Market to Market. We will talk more on Market Plus so you can join us there. You'll find it on our website of MarketToMarket.org. As many of you are returning to school drop by our virtual Market to Market Classroom for information on the science and business of agriculture. You can look it up at markettomarket.org/classroom. Next week we'll look at how one operation is adjusting its agritourism business plan during the pandemic. Until then, thanks for watching. Have a great week.

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Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa PBS or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa PBS which is solely responsible for its content.

What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

(music)  

Tomorrow. For over 100 years we have worked to help our customers be ready for tomorrow. Trust in tomorrow. Information is available from a Grinnell Mutual agent today.

 

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